Atlas Shrugged: The Mocking

Thursday, September 23, 2010

The Rich Are Better Richer

Because they have all the money? And once you have all the money you write laws that will ensure you can keep the money and make lots and lots more?

Yesterday, Tyler Cowen noted a paper arguing that the income of financial professionals makes up a large proportion of the top incomes. Since income inequality has been growing at the very top, this has led many to the conclusion that the very wealthy--and particularly those in the finance sector--have arranged things so that most of the rising incomes in society go to them.

You mean people actually do things to become rich? It doesn't just happen for "systemic reasons"? I don't believe it!

It's certainly not a thesis that I find impossible.

Could she please make that a little less "in your face" as the kids say? It's just far too confident and straight-forward a concession. Maybe she could have added a "perhaps" or "in certain circumstances."

Markets are governed by rules, and incumbents will seek to alter those rules to their own benefit.

We will remember that she said that. For the rest of her life.

The thesis seems especially convincing in the light of the university-based meritocratic elite that has emerged over the last four decades.

We suppose McArdle herself is one of those university-based meritocratic elite as well. The fact that her father grew wealthy as a New York construction industry lobbyist and therefore was able to spend $38,000 per year on her prep school tuition (as well as her sister's, no doubt), thereby gaining admission to an Ivy League school that she confessed she was woefully under qualified for, undoubtedly has nothing to do with anything. Her rise was due to merit, not money, and her hard work and the skill sets she developed. Any poor person with a 2.93 GPA could have gotten into the University of Pennsylvania as well, we are sure.

Bankers are very cosy with the elites in other fields, which is why you see so many folks from Goldman and other top banks cycling through the policy apparatus of both Democratic and Republican administrations.

That said, the proponents of this thesis are all a bit vague on how, exactly, this feat is managed. What rules, for example, are enabling such a small fraction of bankers to charge such exorbitant fees for IPOs?

Very cunning. It's the absence of rules that helped caused the problem; the lack of regulation on the shadow banking system.

One could argue that rule changes such as the SEC's 2004 decision to allow broker-dealers to increase their leverage ratios made that business much more profitable, while socializing the risk onto the rest of us. But that doesn't explain something that is pointed out in the excerpt on Tyler's blog: the prevalence of hedge fund managers at the very top. [snipped quote]

Perhaps it was lack of regulation and policies that encouraged a massive run-up of debt.

For the "political capture" story to work, you'd want to explain this in terms of the carried interest tax rule.

Wait--wait--! Let us guess! The lower tax rates under Republicans had nothing to do with the super-rich's accumulation of wealth!

Hedge fund managers take a substantial part of their compensation as a percentage of the returns that the fund earns; these returns are taxed, not as ordinary income, but as capital gains, at the lower rate. I haven't heard many convincing explanations of why this should be the case; the compensation may be contingent, but that is not the same thing as putting capital at risk. (For that matter, I think that we should eliminate the corporate income tax, and tax capital returns as ordinary income. But that is an argument for another day.)

But while I can certainly explain the continued taxation of hedge fund income at capital gains rates as a function of lobbying--the Democrats still haven't managed to change this, even though they've been talking about it for years, which seems a bit mysterious given that we just passed a huge financial services reform bill. But that doesn't explain why they're making so much pre-tax income.

Maybe it's because of the lack of regulation that enabled them to create toxic financial instruments that they leveraged to the hilt while taking gigantic fees and bonuses?

A different story--"skills based technological change"--seems like it might be a better fit.

Oh, this is going to be good. By which we mean idiotic and demonstrably wrong.

Arguably, computers are especially useful in analyzing financial markets, which has vastly increased the ability of those with the best computers, and computer skills, and financial theory, to make money off of small anomalies in the market. These people are making the markets more efficient--Bob Rubin's first job was simply calling London, and trading based on the differences between prices in London and New York. And they're profiting hugely from the anomalies they find. (Also, arguably, from taking on an unwarranted amount of tail risk--but except to the extent that computers allowed them to magnify it, the tail risk was there before. The profits weren't.)

Scene: A small hipster bar in Washington, DC.

McArdle: How about I say that bankers are just smarter than everyone else?

Mr. McArdle: You said that before. We gotta come up with a new way of saying the same thing. I know! Computers! They're hard to understand and the people who write those programs and make those cool games are really smart. We'll just say that they're smart computer-y people who know lots of stuff and that's why they're rich!

McArdle: What was that middle part again?

Mr. McArdle: Let's go home. I want to see if my copies of Bioshock and KillZone 3 came in today.

McArdle: It doesn't matter. Nobody can figure out what I'm talking about anyway.

You can even fit the regulatory story into this, from a different angle: the government doesn't have the best computers or theorists, and so it can't keep up with the constantly multiplying financial complexity. If it did, maybe it would crack down. That doesn't speak to capture so much as our willingness to pour resources into regulation. If we were serious about regulation, the SEC would have the best paid guys on Wall Street, not the worst. But that's politically unthinkable.

Regulation is always politically unthinkable. We are not sure why. It's certainly not because of "capture"! Heh, the very idea of bankers being dishonest! Pish and tush!

Besides, that still leaves athletes, executive compensation, and whole lot of other factors--this paper says "The data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005." It's hard to explain how the wealthy are manipulating the regulatory apparatus to make Apple vastly more profitable than it would have been forty years ago.

Not that Apple is one of those financial firms that are the subject of her post, but they are a good diversion from the main point. Which is the rich are rich because they are smarter and better and entirely merit-based, and if you don't believe her, just ask the multi-millionaire who pays her.

"In the real world, it's more complicated than that--there are hedonic benefits (and drawbacks) to going to college, which will shift the actual price people are willing to pay; there is the opportunity cost of foregone salary; there is risk; and there is the fact that college freshmen usually aren't so good at calculating the present value of future cash flows."

which has vastly increased the ability of those with the best computers, and computer skillsI got 9 years in IT, so no one can tell me shit. Every time someone talks about computer skills in a non-programmer non-admin context, it boils down to one thing: mastering a particular application or rather a small part thereof (think SAP). This, in turn, boils down to knowing when to click what which to my mind has nothing to do with skill and everything to do with experience. Skills my fat Perl-writing my-own-Linux-distro-compiling ass...

Let's go home. I want to see if my copies of Bioshock and KillZone 3Killzone 3 yes, but only because it's a Playstation-only game and knowing one's way around Playstation probably counts as having computer skills to our Megan. But Bioshock? No fucking way, sorry Susan. First, the whole plasmid and weapon thing is too complicated for Our Lady of Teh 2x4. Second, the story is a parody on the Randian utopia, no way she'd be able to handle it.

The bit about how it's "politically unthinkable" to pay regulators what they're worth is the best, I think. The way to get really top people into the SEC is to make them all wear scratchy polyester uniforms and eat day-old bologna sandwiches for lunch. Otherwise, it's just wasteful government spending.

BTW, reading through the link, it looks like the 2.93 GPA was what she earned while staring out the windows of Penn and that got her into MBA school, not what she earned at Privileged Prep to get into Penn in the first place.

boils down to knowing when to click what which to my mind has nothing to do with skill and everything to do with experience

Amen to that.

Guy figures out how to save keyclicks in excel as a macro and all of a sudden he is Kernighan.

See Megan has to come up with these cockamamie theories of why the rich are rich because she has to avoid the obvious. The rich (mostly) got rich by stealing it fair and square from the willing dupes. They did this by selling the dream of 'you can be like me some day if you only let me make outsize profits'.

Now they employ shills like Megan to make sure the rubes don't figure it out.

Susan,oh right, sorry. But then again, what I said applies to McSuderman, perhaps even doubly so.

cynic,Guy figures out how to save keyclicks in excel as a macroMacro, I wish :) Guy figures out a keyboard shortcut and thinks his Torvalds.

not angry at the senior law firm partners who extract surplus value from their associates and their clients, or angry at the financiers, but angry at... Barack ObamaOh my Lord, I know people like that. Those guys instinctively or subconsciously know that they're being fucked by someone who has power over them, but due to years of indoctrination, they believe there's only one type of power that fucks people over on a daily basis: the one that the government wields. Hence blame it on Obama. Also, the skin color and nominal political affiliation help.Call me an optimist, but I see an opportunity here. They understand the general principle, now all we need to do is to get them to see how it applies in other situations. Any thoughts as to how we can do that?

"Call me an optimist, but I see an opportunity here. They understand the general principle, now all we need to do is to get them to see how it applies in other situations. Any thoughts as to how we can do that? "

Not sure but that "guillotine" thing that keeps coming up sure sounds promising. Sort of a practical Occam's Razor and great for clarifying the mind.

Does the girl live in a bubble? Doesn't she get that the rich are able to buy the politicians, who write the rules that skew the deck in favor of the plutonomy? Didn't she ever read about the Gilded Age?

I think the reason Ms. McArdle uses so much polysyllabic verbiage is to cover up her lack of intellectual horsepower.

I have to laugh at the "university-based meritocratic elite" remark, because you know she's including herself among this "meritocracy." She only got where she is because of daddy's money and connections and some dumb luck. I don't have anything against people in her position, until they start trying to pretend like they bootstrapped their way to the top.

Slacktivist had an interesting post discussing why we make the choices we make. His example was about admitting error.

Bad Jackie cannot tolerate embarrassment, which means it is very important to her that she is never wrong -- almost as important to her as pointing out when others are. Bad Jackie has got it in her head that this is where her value comes from. If she is right and others are wrong, then they are bad and she is good. So if she were to accept being wrong -- even due to having been innocently deceived -- then she would be bad. And she knows that deep down she has a good heart and so that can't be true and she must be right after all. She must be.

Her identity is at stake, you see. Her self-concept and with it her self-worth. This doesn't excuse what she does next, but it can help to understand, and to understand is always a step closer toward forgiving.

Minor point - McBargle's saying her private high school prep tuition was $38,000 in 2008. It would have been cheaper when she attended, and school tuitions have shot up ridiculously in the past 25 years - but nevertheless, it would still be extremely pricy. The main point stands - she's absurdly privileged and always has been, and at rare moments she sorta acknowledges it, but still thinks she's Teh Awesome.

Yes, McArdle takes something that's true and applies to to irrelevant or partially relevant points she's trying to make. There's no mention of the fact that these geniuses made decisions and took risks that blew up the market that had nothing to do with technological advances and everything to do with the unregulated shadow banking industry.